'Fuel liberalisation necessary evil'

by Staff reporter

26 May 2019 at 13:32hrs | Views

Following the Reserve Bank of Zimbabwe's recent directive for oil companies to source foreign currency on the interbank market, analysts have said the move was necessary despite the anticipated short-term pains.

For the past few months, the availability of petrol and diesel has largely been constrained.

This has been attributed to supply limitations as well as suspected currency arbitrage by players taking advantage of the discrepancy between the official and parallel market exchange rates.

All along, oil companies have been accessing foreign currency using the 1:1 rate.

The introduction of the interbank rate in the sector saw fuel prices shooting up, with the Zimbabwe Energy Regulatory Authority (ZERA) announcing that diesel and petrol prices had been increased by around 47 percent.

A litre of petrol is now selling at $4,97; while that of diesel is selling at $4,89.

Prices for most goods and services also went northwards.

Equity Axis chief analyst, Mr Respect Gwenzi said the suspension of the 1:1 peg was critical in removing opportunities of arbitrage in the fuel sector.

"By fully liberalising, it fully subjects the other variable (fuel) to market dynamics, so it's a welcome development but obviously there is bound to be a serious shock in the economy.

"I think what could have been fundamental is to ensure that within our budget levels or within what we promised that this was going to be our macro-framework, we are going to stabilise our revenues to our cost, but I don't see that in the current matrix. The sentiment on the market is not that good, but Government had to liberalise."

Earlier this year, the Government increased fuel prices to $3,11 per litres for diesel and $3,31 per litres for petrol from an average $1,32 per litre and $1,38 per litre respectively.

At the time, the authorities also announced a number of tax rebates that were to be extended to all registered business entities in key economic sectors to cushion them from increased costs as a result of the upward review in fuel cost.

This time around, Government has reduced Zimbabwe United Passenger Company (ZUPCO) bus fares by 50 percent, for both urban and rural trips, a situation that will see urban travellers paying 50 cents from $1 for distances within a 20km radius in a move aimed at cushioning workers.

A distance of up to 30km has now been pegged at 75 cents, from $1,50; while the fare for a distance of up to 40km has been reduced to $1 from $2.

The secretary for Finance and Economic Development, Mr George Guvamatanga, has justified the new subsidy.

"A subsidy is good as long as it is quantified, budgeted and targeted, and in this particular instance, we are targeting the most vulnerable members of the public and we know exactly how much it is going to cost and we have budgeted for it. It is very much sustainable," said Mr Guvamantanga.

"Any responsible Government, even during austerity measures, should provide safety nets for the vulnerable members of our society. There is no austerity without social safety net. It will be very irresponsible for Government not to have social safety nets."

Market analysts Morgan & Co said every country has its reasons to price fuel in a certain way.

They added that Zimbabwe's fuel prices may actually be cheaper than the global average if one takes into account the parallel market rate.

"Global energy markets have undergone a dramatic shift in recent years as the rise of US shale oil has moved the balance of power away from OPEC (Organisation of the Petroleum Exporting Countries), diluting Saudi Arabia's market power, Brent Crude is currently trading at c$1,13 per litre.

"There are substantial differences in petrol prices among countries.

"The differences are largely due to the various taxes and subsidies available in different jurisdictions. All countries have access to the same petroleum prices of international markets but then decide to impose different taxes. As a result, the retail price of petrol is different," says Morgan & Co.

"In Zimbabwe, petrol is retailing at $4,97 per litre. Applying the parallel market rate of 6,5 implies that the petrol price is US$0,65, which is still below the global average of US$1,13.

"That said, the fuel price increases will negatively impact disposable incomes and increase the cost of doing business. We see significant cost pressures affecting local businesses in the outlook period."